Saturday, July 28, 2012

In the rear view mirror, the big number reported this past week was 2nd quarter GDP. The initial throw of the dart came in at +1.5%. This is poor but still positive and not as poor as many had feared. Stay tuned for the revisions over the next several months. Monthly data reported included new home sales, falling from an upwardly revised May number. Durable goods taken as a whole rose, but core capital goods fell. Both measures of capital goods spending have been stalled since February. Consumer sentiment declined to its low of the year. This continues the recent slew of weakly positive or even negative news.

My weekly look at the high frequency weekly indicators are not meant to be predictive at all. Rather, if monthly or quarterly data is "looking in the rear view mirror," weekly data is much closer to observing events in real time. Although weekly data can be noisy, turns will show up here before they show up in monthly or quarterly data.

Let's start again this week with Same Store Sales, which remained mixed but positive, and Gallup was negative.

The ICSC reported that same store sales for the week ending July 21 rose 1.0% w/w, and were up +3.3% YoY. Johnson Redbook reported a 1.3% YoY gain. Shoppertrak, which has been very erratic, reported a +3.4% YoY gain.

The 14 day average of Gallup daily consumer spending, at $68 was $3 under last year's $71 for this period. This is the sixth week in a row in which consumer spending has weakened significantly, and the second worst YoY comparison in two months for the Gallup report. One year ago, sales were building to a good "back to school season" that peaked in early August. Since the beginning of June, however, sales have been in decline. This remains a red flag showing that consumers have turned cautious and that caution has continued through July.

Employment related indicators were also mixed to strongly positive this week:

The Department of Labor reported that Initial jobless claims fell 33,000 from the prior week's unrevised figure, down to 353,000. The four week average fell 8250 to 367,250. The lowest 4 week average during the entire recovery has been 363,000. This number does not appear to be compatible at all with further economic weakness.

The Daily Treasury Statement for the first 18 reporting days of July was $124.7 B vs. $123.3 B a year ago, a very slight +1.1% improvement. For the last 20 days ending on the third Thursday in July, $134.4 B was collected vs. $129.7 B for the same period in 2011, for a gain of 3.6%.

The American Staffing Association Index rose by 4 to 92. This is simply a rebound from the July 4 reporting week. This index has been generally flat for the last three months at 93 +/-1, mirroring its 2nd quarter flatness last year. If this index does not rise back to 93 next week, that would indicate further weakness.

The energy choke collar remains close to re-engaging:

Gasoline prices rose again last week, up .06 to $3.49. Oil prices per barrel feel slightly for the week, down close to $2 at $90.13. Gasoline usage, at 8660 M gallons vs. 8999 M a year ago, was off -3.8% The 4 week average at 8802 M vs. 9088 M one year ago is off -3.1%, still a significant YoY decline; however, June and early July of 2011 were the only months after March 2011 where there was a YoY increase in usage, so the YoY comparison now is especially difficult. This will definitely change in a week or two.

Bond prices and credit spreads both decreased again:

Weekly BAA commercial bond rates fell ..05% to 4.85%. These are the lowest yields in over 45 years. Yields on 10 year treasury bonds were flat at 1.52%. The credit spread between the two declined to 3.33%, but is still closer to its 52 week maximum than minimum. The recent collapse in bond yields shows fear of deflation due to economic weakness.

Housing reports remained mixed:

The Mortgage Bankers' Association reported that the seasonally adjusted Purchase Index declined -2.8% from the week prior, and were also down approximately -3.2% YoY, back into the middle part of its two year range. The Refinance Index rose 1.8% to another 3 year high.

The Federal Reserve Bank's weekly H8 report of real estate loans this week fell -0.1%. The YoY comparison rose to 1.1%. On a seasonally adjusted basis, these bottomed in September and are up +1.2%.

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker were up + 2.4% from a year ago. YoY asking prices have been positive for almost 8 months, and remain higher than at any point last year.

Money supply was positive despite now being compared with the inflow tsunami of one year ago:

M1 rose +0.1% last week, and was up +3.1% month over month. Its YoY growth rate rose to +17.4%, so Real M1 is up 14.6% YoY. M2 rose 0.4% for the week, and was up 0.7% month/month. Its YoY growth rate increased to 8.9%, so Real M2 grew at +7.0%. Real money supply indicators after slowing earlier this year, have increased again, and YoY comparisons are holding generally steady.

The American Association of Railroads reported a +1.9% increase in total traffic YoY, or +9,700 cars. Non-intermodal rail carloads were down -1.9% YoY or -5600, as coal hauling once again turned negative positive, and was joined by agricultural commodities and also some mining and metallic commodities, so negative comparisons are up to 13 of the 20 carload types, a new high. Intermodal traffic, however, was up 14,300 or 6.2% YoY.

Turning now to high frequency indicators for the global economy:

The TED spread declined .02 to 0.35, another new 52 week lows. The one month LIBOR declined very slightly 0.2460. It has risen significantly above its recent 4 month range, it remains well below its 2010 peak, and has still within its typical background reading of the last 3 years. Even with the recent scandal surrounding LIBOR, it is probably still useful in terms of whether it is rising or falling.

The Baltic Dry Index fell another 96 to 933. It is still 263 points above its February 52 week low of 670, although well below its October 2011 peak near 2200. The Harpex Shipping Index fell for the eighth straight week from 423 to 414, but is still up 39 from its February low of 375.

Finally, the JoC ECRI industrial commodities index fell from 118.73 to 117.10. This is still near its 52 week low. Its recent 10%+ downturn during the last few months remains a strong sign of all that the globe taken as a whole is slipping back into recession.

Once again we have weakness, now almost pervasive, in the coincident indicators such as rail traffic, shipping prices, commodity prices, and most especially Gallup's measure of consumer spending. The negative consumer sentiment and core capital goods orders could mean a 3rd negative LEI report in 4 months, which does not bode well for the near future. At the same time the long leading indicators of housing (especially refinancing), real money supply, and corporate bond yields continue to be positive, joined this week by initial jobless claims.

This coming week, real income, auto sales, payrolls and average wage data will give us further hard information as to how far the weakness goes, and whether real consumer income is positive YoY for the first time in 1 1/2 years.

Last week I wrote that, compared with the onset of previous recessions, in which a rise of initial claims of 10% or more off the bottom was almost always required, the current situation only appeared to support slow growth but not actual contraction.

This week's number makes for an even more dramatic comparison. As of now initial claims are less than 2% higher than their lowest point in the recovery:

Suffice it to say that we are now well below the lower bound of the past conditions required for consistency with the onset of actual economic contraction.

With the addition of this week's data, once again last year's pattern of an increase during the second quarter which subsided in the third quarter is so far being repeated this year:

When we measure weekly, as opposed to by the 4 week average, we see that the two lowest weekly claims reports of the entire recovery have been this month:

If, despite new lows in weekly claims being made and the 4 week average being only 1%+ off its bottom, we are in a recession anyway, then initial jobless claims have lost almost all use as leading indicators.

Over the last week, I've taken a look at the various sectors of the US economy, using the Beige Book and Ben's Congressional statements as the basis of my analysis. Here's are my thoughts:

Employment: why this isn't a daily issue on everybody's tongues is absolutely beyond me. We've been over 8% for a long time, and yet, no one is doing anything. Here's the bigger problem. There are three sectors of employment: government, manufacturing and service. While manufacturing jobs have increased, they've done so at a slow pace. This is part of a longer trend in US manufacturing, where the amount of labor inputs has been declining for the better part of ten years -- a trend which is occurring as a result of automation and an aging population. This means the trend will not abate. So, even if we have an increase in manufacturing employment (which we have), we're not gong to have a big increase. Service sector jobs are increasing and are almost at pre-recession levels. The problem is government jobs, which have been cut by 600,000. I realize that many people think the US government is in a bloated state etc.., but the reality is government provides necessary services to the population -- services like education, policing, fire prevention, public health, etc... As an example, in Texas, we've cut $4 billion from education in the latest legislative session. That will eventually come back and bite the state in the ass, but only after the current administration is out of office and probably dead. These cuts are short-sided and ridicules. Overall government job cuts are a prime reason why the unemployment rate is over 8% still.

Manufacturing: here, we're treading water, as evidenced by the industrial production and capacity utilization charts. While these indicators have stalled over the last few months, we haven't seen an outright decline. We are seeing weakness in some of the regional numbers -- notably the Richmond and Philly figures -- but these numbers are contained in the Atlantic regions (at least, so far). The durable goods numbers have a slight downward trend, but not an absolute decline. The ISM number has only shown one month of contraction -- although the report attributed that contraction to the EU situation which is not getting better. So, again, we're treading water with a slight downward bias, but not an imminent collapse.

Consumer Spending: here, the overall personal consumption expenditures are OK. We see increases in service and non-durable spending, but a declining trend in durable goods purchases. However, as pointed out by Tim Duy, the three month retail sales figures are abysmal -- especially when we take out cars and gasoline purchases. Clearly, the US consumer is concerned about the future, and is cutting back on spending at the retail level. While this is a smaller data set than PCEs, they are incredibly important and need to be watched.

Housing: here, I think we've reached bottom in the overall market. Over the last 6 months, we've seen positive reports from the home builders in their respective 10-Q statements, an increase in their respective stock prices, a stabilization of sales, a decrease in inventory, a continued and fairly disciplined clearing of shadow inventory, a stabilization of prices, and an increase in housing permits. The big problem that will probably prevent this sector from taking off is the employment situation, which obviously decreases the number of buyers.

Services: here the economy is chugging along. This sector is not going to break any growth records soon, but it does appear to be pretty decently in the positive growth mode. However, the latest ISM report's anecdotal section had several statements to the effect that growth was slowing, meaning the slowdown could be hitting this sector as well.

So, we're about where we've been for the last few years -- an economy that is going to grow somewhat positively (0%-2%), bit has just enough internal and external weakness to prevent growth from really taking off.

The entire US treasury curve is still rallying; there is no sign of any sell-off. All the prices are still above the EMAs (all of which are rising) and momentum is still bullish. We're not going to see any major move from the equity markets until money flows out of the safe haven markets.

The entire US corporate curve is in the same situation. The only different is the short and intermediate charts both have an MACD that has either given or is about to give a sell signal. This may indicate investor sentiment is changing. However, once we see a big change in that area, the next move indicating a change of trader's hearts will be a break of the EMAs.

After rallying last week, oil retreated from the 200 day EMA to the 50. Also note the 10 and 20 day EMA are caught in the 50 day EMA. Momentum is positive and prices are strengthening, I'd expect another run at the 200 day EMA fairly soon.

Thursday, July 26, 2012

The Great Plains to Midwest: Unrelenting heat and
lack of rain continued the downward spiral of drought conditions. D0
to D2 expanded across parts of the Plains from Texas to North Dakota,
from Missouri to Minnesota, and in the southern Great Lakes. Extreme
drought (D3) was introduced in Nebraska, Missouri, and Wisconsin, and
D3 expanded in Arkansas, Oklahoma, Kansas, and Indiana. The city of
Indianapolis, Indiana, implemented mandatory water restrictions for the
first time ever with many trees dropping their leaves and going dormant
months early. Exceptional drought (D4) expanded in Arkansas and was
introduced in western Kansas.

Employment levels grew at a tepid pace for most Districts since the last
report. The Boston, Cleveland, Atlanta, Chicago, and Dallas Districts
said employment levels were flat to up slightly, with most contacts
citing U.S. fiscal policy uncertainty or weak demand for their
conservative approach to hiring. Kansas City said employers were
reluctant to increase wages or hire full-time staff until economic
uncertainty diminishes. A Richmond District employment agency contact
noted an increase in temporary employment turning into permanent
positions since the last report. The Atlanta District noted some smaller
chain stores with low price points were expanding and hiring at a
significant pace. Several Districts noted that employers were having
difficulty filling highly skilled positions

Conditions in the labor market improved during the latter part of 2011
and early this year, with the unemployment rate falling about a
percentage point over that period. However, after running at nearly
200,000 per month during the fourth and first quarters, the average
increase in payroll employment shrank to 75,000 per month during the
second quarter. Issues related to seasonal adjustment and the unusually
warm weather this past winter can account for a part, but only a part,
of this loss of momentum in job creation. At the same time, the jobless
rate has recently leveled out at just over 8 percent.

There really is little more to say about the US employment situation, except to say it's terrible. However, let's look at the data to get a clear picture.

The top two charts show the 4-week average of initial unemployment claims. The top chart places this number into historical perspective. Overall, the series isn't too bad, but it certainly could be better. However, the middle chart shows that this data series is -- instead of dropping sharply -- is actually meandering lower. This, in turn leads to a chart of the overall unemployment rate, which is still stubbornly and persistently high 4 years into a recovery.

The above chart shows the median weeks unemployed. While this number has moved lower over the last few weeks, it is still far too high by historical standards and has remained incredibly high for the duration of the recovery.

The above four charts are a great data series; the percent of the unemployed who have been unemployed and for what period of time. The real crime in these charts is the lowest chart, which shows that over 40% of the unemployed have been that way for over 27 weeks. In addition, there has been little, meaningful movement in this number. Also note that in the top numbers, we've seen a little spike up over the last few weeks -- not a healthy development, as it indicates more people are entering the ranks of the unemployed.

Finally, in breaking the jobs market down into the government, manufacturing and service sector, we see that government job losses are by far the primary reason for the weak unemployment picture.

What more can anyone say that hasn't already been said about employment? It's terrible and needs improvement. Of course, note that Congress has done absolutely nothing to improve this picture.

The IWM P&F chart shows that we had a sell-off in May and June, a rally from June to July and then a sell-off for the last few weeks.

The QQQs P&F chart shows that prices have been in a fairly tight range (62-65) for most of July.

And the SPYs have been in a range of 132-138 for the last few months as well.

The great thing about P&F charts is they take out the noise and show absolute price moves without the daily "up 5 points, down 1 point" reporting. And the above charts show that prices have actually been moderately stable for that time period.

After dropping from 51 to 42 (a move of about 18% from May through June), the copper ETF has been trading in a tight range (from 42-45) for the last month and a half. Prices are still below the 200 day EMA (which is also moving lower) and the MACD has given a sell-signal. However, money is moving into the market and prices are moderately strong. Also note the low volatility. This chart is trying to form a bottom. However, with weak news from a variety of economies continually coming out, it's hard to see how this chart can rally strongly in the near term.

After spiking for a few weeks, the entire grains complex has taken a breather, largely as traders have taken some money off the table. The most likely course of action for these futures is a sideways trade for a bit (2-4 weeks) as trader get their bearings on what the final crop looks like. However, that assumes we won't have any freak weather events -- which is not as unlikely as we would like.

Wednesday, July 25, 2012

In reality, there’s remarkable consensus among mainstream
economists, including those from the left and right, on most
major macroeconomic issues. The debate in Washington about
economic policy is phony. It’s manufactured.

And it’s entirely
political.

Let’s start with Obama’s stimulus. The standard Republican
talking point is that it failed, meaning it didn’t reduce
unemployment. Yet in a survey of leading economists conducted by
the University of Chicago’s Booth School of Business, 92 percent
agreed that the stimulus succeeded in reducing the jobless rate.
On the harder question of whether the benefit exceeded the cost,
more than half thought
it did, one in three was uncertain, and
fewer than one in six disagreed.

Or consider the widely despised bank bailouts. Populist
politicians on both sides have taken to pounding the table
against them (in many cases, only after voting for them). But
while the public may not like them, there’s a striking consensus
that they helped: The same survey found no economists willing to
dispute the idea that the bailouts lowered unemployment.

How about the oft-cited Republican claim that tax cuts will
boost the economy so much that they will pay for themselves?
It’s an idea born as a sketch on a restaurant napkin by
conservative economist Art Laffer. Perhaps when the top tax rate
was 91 percent, the idea was plausible. Today, it’s a fantasy.
The Booth poll couldn’t find a single economist who believed
that cutting taxes today will lead to higher government revenue
-- even if we lower only the top tax rate.

The consensus isn’t the result of a faux poll of left-wing
ideologues. Rather, the findings come from the Economic Experts
Panel run by Booth’s Initiative on Global Markets. It’s a
recurring survey of about 40 economists from around the U.S. It
includes Democrats, Republicans and independent academics from
the top economics departments in the country. The only things
that unite them are their first-rate credentials and their
interest in public policy.

As I've grown older, I've really started to hate politicians on both sides of the aisle with equal relish. I left the Democratic party several years ago, largely because I'm too "pro business." There is a distinct dislike on the left side of the aisle for people who understand markets or have any degree of financial acuity. At the same time -- and over the same period -- the Republicans have become stark-raving mad. Anyone with an IQ above that of a dead person or who thinks in nuance is the enemy.

That being said, no party in Washington is making any economic sense. The Republicans are off on an Ayn Rand austerity kick, using the Paul Ryan budget as their blueprint. This document is, well, laughable at its best. The results would be catastrophic in terms of overall growth. The Democrats, on the other hand, have absolutely no idea what policies to propose, suggest or coalesce around. They timidly make mild suggestions via the press, only to then see what the Republican (or more specifically, the Republican media apparatus) says in response, usually resulting in them backing down, with the end result being nothing happens.

Ask any sane economist (not some hack on the payroll of any think tack or in the pocket of some ideological master) and you'll get a fairly clear answer on how to handle the current situation. Macro 101 says: boost demand. Borrow at low rates, build out infrastructure (which is in terrible shape) lower blue-collar unemployment (which is in terrible shape), boost overall economic demand to increase growth. It's really not that complicated. And no, these are not fake jobs, and no, it's not ephemeral growth. It's very real.

But neither party is listening to any amount of sane reasoning right now. They're both .., well, pretty useless.

Demand for nonfinancial services was generally stable to slightly
stronger since the previous report. Richmond noted that revenue
improvement was strong among professional, scientific, and technical
firms. Strength in energy, legal, and audit-related services was noted
in the Dallas District. Advertisers in the Philadelphia and San
Francisco Districts reported strong revenues, and consulting and
advertising contacts in the Boston District noted steady activity.
Richmond and San Francisco reported that restaurants were busy, while
food service contacts in Atlanta reported that demand had softened a
bit.

Transportation contacts reported that activity was generally
positive. In the Atlanta and Dallas Districts, rail contacts reported
strong shipments of petroleum and motor vehicles and equipment. The
Richmond District reported increases in port activity with container
volumes and tonnage at or near record levels. Input from logistics and
trucking contacts was mixed. The Cleveland and Atlanta Districts noted
softening volumes and less-robust forecasts for the remainder of the
year. Kansas City's report cited an uptick in trucking activity, while
San Francisco's report cited moderating growth in trucking

Oddly enough, there is actually precious little hard data on the service sector of the economy, save for the ISM services index.

Overall, we still see readings above 50, indicating expansion. While the data series has a slightly downward trend to it, it's certainly not fatal.

"General state of business this month is flat, with no changes." (Construction)
"Business is steady and an increase over last month, as we begin our peak season." (Arts, Entertainment & Recreation)
"We are starting to experience a slowdown from the modest, grinding improvements our market areas have been experiencing of late." (Finance & Insurance)
"Patient counts continue to be lower than budget." (Health Care & Social Assistance)
"Business is still growing, but there has been a definite slowing in growth." (Wholesale Trade)
"We have noticed a slowing of customer counts and sales over the last 30 to 60 days, compared to the same period last year." (Accommodation & Food Services)
"Stable business globally, but softening backlog as clients further tighten discretionary spend." (Professional, Scientific & Technical Services)

Notice that most of the comments focus on the slowing overall growth in demand.

While the data is a bit thin to draw strong conclusions, the overall impression is one of a slowing sector.

We have seen modest signs of improvement in housing. In part because of
historically low mortgage rates, both new and existing home sales have
been gradually trending upward since last summer, and some measures of
house prices have turned up in recent months. Construction has
increased, especially in the multifamily sector. Still, a number of
factors continue to impede progress in the housing market. On the demand
side, many would-be buyers are deterred by worries about their own
finances or about the economy more generally. Other prospective
homebuyers cannot obtain mortgages due to tight lending standards,
impaired creditworthiness, or because their current mortgages are
underwater--that is, they owe more than their homes are worth. On the
supply side, the large number of vacant homes, boosted by the ongoing
inflow of foreclosed properties, continues to divert demand from new
construction

Reports on residential housing markets remained largely positive. Sales
were characterized as improving in Philadelphia, New York, Richmond,
Chicago, St. Louis, and Minneapolis, while home sales increased in
Boston, Cleveland, Atlanta, St. Louis, Minneapolis, Kansas City, Dallas,
and San Francisco. However, reports on sales were mixed in the New York
District, and gains in the Boston District eased from earlier in the
year. New home sales were described as disappointing in the Philadelphia
District. Construction increased in the New York, Atlanta, St. Louis,
Minneapolis, Dallas, and San Francisco Districts, while reports from the
Cleveland District said construction slowed. Most Districts reported
declines in home inventories. Homes prices have begun to stabilize in
some markets and price increases were noted in select markets. Boston
and Atlanta noted that appraisals were coming in below market prices

Both NDD and I have written pretty extensively about the current situation in the housing market. See here, here, and here. NDD also wrote a very good series a few months ago which was a rebuttal to Barry's negative housing take. In summation, both of us feel the housing market has bottomed and there are now signs of an increase in activity. However, this is still a new development, and the market is still weak.

The stabilization of the housing market suggested by various national
indicators is corroborated by looking at a number of indicators
disaggregated to the county level. Importantly, the median county is now
experiencing stable house prices on a year-over-year basis. Transaction
volumes in most markets, while still far below normal, have steadied.
Finally, the share of distressed sales, although still very high in many
markets, appears to have peaked. If these trends continue, then local
housing markets are making progress in their convalescence. However, our
analysis indicates that most local housing markets still have a way to
go to achieve a clean bill of health.

The Brazilian market is near a two year low. Prices have been trading in a fairly narrow range for the last few months. Prices are also below all the EMAs (including the 200 week EMA) and the shorter EMAs are all headed lower. While the MACD may be about to give a but signal, remember that this indicator is still negative and the underlying economy is still weak.

The Russian market is trying to rally from a near two year low. The MACD has given a buy signal and its trajectory is rising. In addition, prices are strengthening. However, prices must still move through all the EMAs and overcome a negative CMF. The first key will be holding a weekly level that's above its current trend line.

The Indian market is in the exact same position as the Russian market.

The Chinese market is not at or near multi-year lows. Instead, it's resting right at levels established at the end of last year. However, the EMA picture is very negative -- all are moving lower and the shorter EMAs are below the longer EMAs. Money is flowing out of the market and prices are moderately strong.

With all of the above charts, note that the Bollinger Band width is declining, indicating volatility is decreasing. This is usually a precursor to a bottom; we can but hope at this point.

The chart above shows the difference between the 10 year treasury and the effective Federal Funds rate. Notice there is still a long way to go before we're near a recessionary reading.

The above chart shows the difference between the 10 and 2 year US treasury. Again, notice that we're above a recessionary reading, although the difference is declining.

After posting strong gains over the second half of 2011 and into the
first quarter of 2012, manufacturing production has slowed in recent
months. Similarly, the rise in real business spending on equipment and
software appears to have decelerated from the double-digit pace seen
over the second half of 2011 to a more moderate rate of growth over the
first part of this year. Forward-looking indicators of investment
demand--such as surveys of business conditions and capital spending
plans--suggest further weakness ahead. In part, slowing growth in
production and capital investment appears to reflect economic stresses
in Europe, which, together with some cooling in the economies of other
trading partners, is restraining the demand for U.S. exports.

Manufacturing continued to expand in June and early July in most
Districts, but at a more modest pace compared with earlier in the year.
Several Districts reported that new orders had moderated since the last
report, but the Philadelphia, St. Louis, and Kansas City Districts were
more optimistic that new orders would rebound. The Philadelphia and
Richmond Districts however, reported declines in shipments and orders.
The passing of a transportation bill through Congress led contacts in
the Philadelphia District to express interest in increasing their
capital spending. Capacity utilization rates at refineries and
petrochemical manufacturing facilities held steady in the San Francisco
District, with weaker domestic demand being offset by growing exports.
Meanwhile, manufacturers in the Dallas District reported operating at
above 90 percent utilization rates to catch up with below-normal
inventory levels

First, note that in Ben's testimony, he places the blame for the slowdown in US manufacturing on the EU and developing market situation. This is a very important point, and one that we have stressed on this blog for the last six months, especially as we have seen the BRIC countries experience a big slowdown in growth, albeit for various reasons.

Lets start with a macro view of the manufacturing sector:

The ISM manufacturing index had readings above 50 for a little over a year. However, it's latest reading showed a contraction with a reading of just below 50.

More importantly, the new orders index dropped sharply in its last reading.

The above chart compares the ISM reading (blue) with the ISM new orders number (red). Notice the tight correlation, along with the fact that new orders typically lead the overall ISM reading.

The durable goods orders numbers show an overall stagnation with a slight downward trend over the last 7 months.

The top chart shows overall industrial production. While it has moved upward slightly over the last five months, that rate of increase has definitely slowed. More important, the capacity utilization number below indicates that the rate of industrial expansion has slowed, confirming the slowing trend in the IP numbers.

The above macro numbers indicate that the overall manufacturing sector is stalling, most likely as a result of the slowdown in the EU and developing markets.

One of the running themes in my long term outlook since the Great Recession has been that the American economy is in a race between debt deleveraging by households, and wage stagnation leading to outright wage deflation. If households deleverage in time, they will be able to safely spend more, with increasing demand will come increasing jobs, and real wages can stabilize at a rate of growth comfortably above zero. On the other hand, if wage deflation strikes before households are fully deleveraged, then we are very much in a scenario similar to if not the same magnitude as the 1929-32 vicious cycle.

At this point, the odds are increasingly favoring deflation winning out.

Here is an updated graph, through June, of average hourly earnings measured YoY:

Even during the Great Recession, with wages growing at a nominal annual rate of 3%, there was room for real wages to grow if the inflation rate was 1% or even 2%. At 1.5%, we are running out of room. Even a YoY inflation rate of 2% is too much for households. If this trend holds, we have no more than 24 months before actual wage deflation is upon us -- and remember, mean wage growth has been higher than median wage growth, which unfortunately is only reported quarterly.

Here is what is happening with real wages, i.e., wages deflated by the CPI, both seasonally adjusted (blue) and non-seasonally adjusted (red):

On a seasonal basis, inflation tends to accelerate in the early months of the year, and become quiescent later in the year. This probably is a large part of the explanation as to why recently the economy seems to grow more at the end of the year, and then slow down in the first half of the next year.

Here's a close-up of the same information for the last year:

Note the 1.3% decrease in real wages between December of last year and April of this year.

Now here's the YoY% change in real wages:

Notice that on a YoY basis, real wages declined nearly 2% in late 2011, as bad a relationship as during the middle of the Great Recession. As of June of this year, this has nearly totally abated, as wages are only down about 0.2% YoY. With any luck, this will turn positive this month or in August. If the ongoing tension with Iran does not cause another spike in gas prices, this should temporarily ease the strain on consumers.

To complete the picture, here is the latest information (through the first quarter) on household deleveraging. This looks encouraging until you know that in each of the last two quarters, revisions to past data have completely wiped away any continuing progress in deleveraging. In other words, the levels of debt now are almost exactly what they were initially reported to be in the third quarter of 2011:

The chances that household deleveraging will reach new series lows sufficiently before 24 months from now so as to generate robust and safe new consumer spending by then appear increasingly remote.

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